Pay No Attention to That Crazy Man on TV

Why you should never take Jim Cramer seriously.

It would be impossible to write a "Bad Advice" column about investing without discussing Jim Cramer. I have been through several stages of feelings about Cramer. My initial belief was that the former hedge-fund manager, host of CNBC's hit show Mad Money, and author of several books about speculating was perhaps the worst thing to happen to the financial security of average Americans since the crumbling of the Social Security system. I developed this theory in the early Mad Money days, when Cramer's stock-picking track record—if on-air shouts, blurts, and Tourette's-style tics can ever be called a "record," which, in a serious context, they obviously can't—remained close enough to market averages that Cramer was not laughed out of town when he suggested with a straight face that he was giving good advice.

His claim, of course, was ludicrous: Over short time frames, even orangutans have about a 50/50 chance of beating the market, especially when ignoring risks and costs, so his pointing to a several-month record as evidence of good advice was absurd. In 2006, however, when the performance of Cramer's ravings relative to the market went south, he downplayed the idea that he could help viewers whip Wall Street, and, instead, said that he had "just one goal in mind—to help you make money." According to one observer, he apparently failed to clear even this low hurdle last year, despite nearly every major equity market on earth being up between about 15 percent and 30 percent.

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As readers of this column and the "Wall Street Self-Defense" series know, when investment gurus start patting themselves on the back for "making you money," they are condescendingly presuming that you know almost nothing about investing. When you own a diversified portfolio of stocks, it is rarely the stock selections that make you money but the performance of the stock market overall—which, thankfully, usually goes up. What a truly talented stock-picker will do is select stocks that beat the market, after costs, without exposing you to more risk than the market. Because the vast majority of stock-pickers can't do this, you are almost always better off in a diversified portfolio of low-cost index funds. Properly constructed, such a portfolio will, over decades, make you more money, with less risk, than even an above-average stock-picker (let alone a chair-throwing, self-aggrandizing clown).

But the more I thought about Cramer, the more I realized that pointing out that he gives terrible investment advice would be like pointing out that the sun rises. Worse, I would be dismissed as a wet blanket who didn't get that the point of Mad Money was just to have a bit of ironic fun. I mean, of courseJim Cramer gives terrible investment advice —we all know that, right?—and we only watch the show because, well, because he does possess a certain bizarre type of market and entertainment genius—if there's a pundit out there with more opinions about more stocks, I've never seen him—and he's irreverent, madcap, and, yes, even brilliant, in an idiot-savant, freak-show sort of way. (Moreover, Cramer is mesmerizing reality TV. Admit it: You watch because you wonder if this is the night he finally has a heart attack, kills someone, or explodes in a tirade of expletive-laced slander.)

Reviewing the list of common Mad Money show segments (Stump the Cramer, Am I Nuts?, Pimpin' All Over the World) and sound effects (squealing pigs, a wrecking train, a toilet flushing, a screaming man falling out a window and then crashing on the ground), I realized that, yes, I was taking Jim Cramer waaaaaay too seriously, that his nonstop comedy routine about being a brilliant and respected investor and making everyone rich is just shtick, and that there couldn't possibly be a Mad Money viewer who actually believes that he provides intelligent advice.

There is, of course, another James J. Cramer—the one who graduated from Harvard Law School, writes an often sober and astute column in New York magazine, and might actually have put up decent numbers at a hedge fund in the 1990s (impossible to say for sure until we can evaluate year-by-year relative returns, risk profile, standard deviation, etc.). That Cramer is a smart man. Smart enough to have read decades of conclusive research about the lousy odds facing all speculators— especially amateurs; smart enough to understand the crippling impact of research, transaction, and tax costs; smart enough to know that when a stock tip is delivered on national television it is no longer of any use (because everyone else now has it); and smart enough to write, in 1999, about an excellent book by a true hero of individual investing, John Bogle, that "After a lifetime of picking stocks, I have to admit that Bogle's arguments in favor of the index fund have me thinking of joining him rather than trying to beat him."

The two Cramers—brilliant James J. and vaudeville comic Jim—embody the essential conflict in the American financial industry: the war between intelligent investing (patient, scientific, boring) and successful investment media (frenetic, personality-driven, entertaining).

Henry Blodget's book, The Wall Street Self-Defense Manual, was recently published by Atlas Books and Slate. You can buy the book here. You can learn more about it here.